HSBC 2009 Annual Report Download - page 200

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Regulation and supervision > US // Risk management > Introduction / Risk governance
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returns, and holds regular discussions with the
management of the banks to review their operations.
The HKMA may also conduct ‘on-site’ examinations
of banks and, in the case of banks incorporated in
Hong Kong, of any local and overseas branches and
subsidiaries. The HKMA requires all authorised
institutions to have adequate systems of internal
control and requires the institutions’ external
auditors, upon request, to report on those systems
and other matters such as the accuracy of
information provided to the HKMA. In addition, the
HKMA may from time to time conduct tripartite
discussions with banks and their external auditors.
The HKMA has the power to serve a notice of
objection on persons if they are no longer deemed to
be fit and proper to be controllers of the bank, if they
may otherwise threaten the interests of depositors or
potential depositors, or if they have contravened any
conditions specified by the HKMA. The HKMA may
revoke authorisation in the event of an institution’s
non-compliance with the provisions of the Banking
Ordinance. These provisions require, among other
things, the furnishing of accurate reports.
The HKMA implemented Basel II with effect
from 1 January 2007 for all Authorised Institutions
incorporated in Hong Kong.
The marketing of, dealing in and provision of
advice and asset management services in relation to
securities in Hong Kong are subject to the provisions
of the Securities and Futures Ordinance of Hong
Kong (‘Securities and Futures Ordinance’). Entities
engaging in activities regulated by the Securities and
Futures Ordinance are required to be licensed. The
HKMA is the primary regulator for banks involved
in the securities business, while the Securities and
Futures Commission is the regulator for non-banking
entities.
US regulation and supervision
HSBC is subject to extensive federal and state
supervision and regulation in the US. Banking laws
and regulations of the Board of Governors of the
Federal Reserve System (the ‘Federal Reserve
Board’), the Office of the Comptroller of the
Currency (the ‘OCC’) and the Federal Deposit
Insurance Corporation (the ‘FDIC’) govern many
aspects of HSBC’s US business.
HSBC and its US operations are subject to
supervision, regulation and examination by the
Federal Reserve Board because HSBC is a ‘bank
holding company’ under the US Bank Holding
Company Act of 1956 (‘BHCA’), as a result of its
control of HSBC Bank USA, N.A., McLean,
Virginia (‘HBUS’); HSBC Trust Company
(Delaware), N.A., Wilmington, Delaware (‘HTCD’);
and Wells Fargo HSBC Trade Bank, N.A., San
Francisco, California (‘WFTB’). HSBC North
America Holdings Inc. (‘HNAH’), formed to hold
HSBC’s US and Canadian operations is also a ‘bank
holding company’. Both HSBC and HNAH are
registered as financial holding companies (‘FHC’s)
under the BHCA, and, accordingly, may affiliate
with securities firms and insurance companies and
engage in other activities that are financial in nature
or incidental or complementary to activities that are
financial in nature. The ability of HSBC and HNAH
to engage in expanded financial activities as FHCs
depends upon HSBC and HNAH continuing to meet
certain criteria set forth in the BHCA, including
requirements that their US depository institution
subsidiaries be ‘well capitalised’ and ‘well
managed’, and that such institutions have achieved at
least a satisfactory record in meeting community
credit needs during their most recent examinations
pursuant to the Community Reinvestment Act.
In general, under the BHCA, an FHC would be
required, upon notice by the Federal Reserve Board,
to enter into an agreement with the Federal Reserve
Board to correct any failure to comply with the
requirements to maintain FHC status. Until such
deficiencies are corrected, the Federal Reserve
Board may impose limitations on the US activities of
an FHC and depository institutions under its control.
If such deficiencies are not corrected, the Federal
Reserve Board may require an FHC to divest its
control of any subsidiary depository institution or to
desist from certain financial activities in the US.
The three US banks, HBUS, HTCD, and WFTB
are subject to regulation and examination primarily
by the OCC, secondarily by the FDIC, and by the
Federal Reserve Board. Banking laws and
regulations restrict many aspects of their operations
and administration, including the establishment and
maintenance of branch offices, capital and reserve
requirements, deposits and borrowings, investment
and lending activities, payment of dividends and
numerous other matters.
In December 2007, US regulators published a
final rule regarding Risk-Based Capital Standards:
Advanced Capital Adequacy Framework – Basel II.
This final rule represents the US adoption of
Basel II. The final rule became effective on 1 April
2008, and requires large bank holding companies,
including HNAH, to adopt its provisions no later
than 1 April 2011. HNAH has established
comprehensive Basel II implementation project
teams comprised of risk management specialists
representing all risk disciplines. In addition, US
banking authorities have adopted ‘leverage’ capital